I Bonds - now or later in the year?

[ZiziPB]

I'm planning to purchase another $10K worth of IBonds this year. Any thoughts on whether the anticipated Fed rate increase will affect the IBonds and whether it would be advisable to wait a few months?

[Grt2bOutdoors]

It would be a miracle if the Treasury raised the fixed rate to a positive number above zero. The variable rate is going to come down, likely to be zero come May.

[telemark]

I bought my 2015 allocation in January, not seeing any point in trying to outguess the Treasury. The sooner you buy, the sooner you get past the twelve-month waiting period before you can access the money again.

To put it another way, to me the main benefits of I bonds are safety and liquidity. A few basis points one way or another don't seem that important.

[z3r0c00l]

I have my 10K for this year in a no penalty CD and figured that with the expected 0 variable rate coming in May, I might as well hold out until then in hopes of a .1 or even .2 percent fixed. I mean won't they struggle to sell iBonds offering nothing? Anyway, keeping the 10K liquid for a few more months while more money becomes liquid is something of a flip-side argument to that above (getting the new iBond liquid sooner). I doubt it will matter in the long run either way!

[Grt2bOutdoors]

I have my 10K for this year in a no penalty CD and figured that with the expected 0 variable rate coming in May, I might as well hold out until then in hopes of a .1 or even .2 percent fixed. I mean won't they struggle to sell iBonds offering nothing? Anyway, keeping the 10K liquid for a few more months while more money becomes liquid is something of a flip-side argument to that above (getting the new iBond liquid sooner). I doubt it will matter in the long run either way!

The Treasury isn't struggling to sell debt if that's what you mean. In fact, buyers are banging on the doors from Europe, begging them to "Please take my money" anything yielding a positive return is better than the negative rates being offered in Western Europe right now.

[J295]

My suggestion is to purchase on a regular schedule and refrain from guessing on the "best time."

[Bustoff]

I bought my 2015 allocation in January, not seeing any point in trying to outguess the Treasury. The sooner you buy, the sooner you get past the twelve-month waiting period before you can access the money again.

To put it another way, to me the main benefits of I bonds are safety and liquidity. A few basis points one way or another don't seem that important.

+1
I buy the maximum every January.

[beardsworth]

If new I Bonds were paying 3% + inflation, as they did a decade or more ago, I would agree with those who advocate just buying each year's quota early in the year without fussing over a possible change of a few tenths of a percent. But the fixed rate portion is zero now, so I see no harm in waiting to see if it goes up on May 1. I also agree with others here who believe it likely that the new fixed rate announced May 1 will not be higher than zero, in which case I will then see no harm in waiting to see if it goes up on November 1.

Since I Bonds pay interest for up to 30 years, I'm assuming that most buyers of I Bonds are interested in long-term inflation protection, rather than just using these bonds as substitutes for a short-term cash emergency fund. If so, I think that would argue for trying (to the extent possible) to get each year's highest fixed rate, and we already know that the fixed rate can't possibly go lower than it is now, so why rush?

[sawhorse]

The past few months have seen deflation rather than inflation, mainly due to the fall in oil prices. The inflation portion of the rate could be 0 as well. Thankfully they can never be negative.

[gasman]

If new I Bonds were paying 3% + inflation, as they did a decade or more ago, I would agree with those who advocate just buying each year's quota early in the year without fussing over a possible change of a few tenths of a percent. But the fixed rate portion is zero now, so I see no harm in waiting to see if it goes up on May 1. I also agree with others here who believe it likely that the new fixed rate announced May 1 will not be higher than zero, in which case I will then see no harm in waiting to see if it goes up on November 1.

Since I Bonds pay interest for up to 30 years, I'm assuming that most buyers of I Bonds are interested in long-term inflation protection, rather than just using these bonds as substitutes for a short-term cash emergency fund. If so, I think that would argue for trying (to the extent possible) to get each year's highest fixed rate, and we already know that the fixed rate can't possibly go lower than it is now, so why rush?

Agree. Barring a surprise reset in May, I plan to by my allocation in November.

[ZiziPB]

Thanks all, I buy IBonds for my portfolio as part of the fixed portion of the AA and I plan to keep them for at least 5 years. I don't use them for my emergency fund. If I wait till November, I would put the $10K into a savings account at 1% in the meantime.

ETA: an alternative to iBonds would be an Ally 2 year "raise your rate" CD currently at 1.29%. I don't have any CDs currently in the fixed income bucket.

[#Cruncher]

The inflation portion of the rate could be 0 as well. Thankfully they can never be negative.

The inflation rate can be negative. However, the composite rate which combines the fixed and inflation rate is limited to a minimum of 0%. The formula for computing the composite rate is:

Code: Select all

composite rate = fixed rate + (2 X inflation rate) + (fixed rate X inflation rate)

To illustrate, assume the CPI declines 1% from September 2014 to March 2015 (the period used for determining the I Bond inflation rate). Here are the corresponding composite rates for I Bonds with fixed rates of 0%, 1%, 2%, and 3%:

Code: Select all

Annual Fixed Rate            0.00%    1.00%    2.00%    3.00%
Semi-annual Inflation Rate  (1.00%)  (1.00%)  (1.00%)  (1.00%)
Result of formula           (2.00%)  (1.01%)  (0.02%)   0.97%
Annual Composite Rate        0.00%    0.00%    0.00%    0.97%

In this hypothetical case any I Bond with a fixed rate of 2% or less would have a 0% composite rate. I Bonds with a fixed rate higher than 2% would have a positive composite rate.

[wassabi]

[Thread merged into here, see below. --admin LadyGeek]

I bought my first I-bond this time last year. Would like to buy another $10k this year. Is there a strategy I should be aware of before I buy? E.g., should I wait until May or November for new rates?

[sawhorse]

I'm waiting for the new rates because it can't be any less than 0. At the same time, even if it is higher, it won't be meaningfully higher. The last few months have seen seen big drops in oil, so I wouldn't be surprised if the inflation component is actually negative even though the bond itself can never be negative.

[N52570]

Given where it is now, I'd wait until late October and just before the November 1st change and make an educated guess whether it'll go up or down from what happens in May. IMO.

[Spirit Rider]

We are in a relatively unique situation with I Bonds.

Only once previously since Sep 1998 has there been a deflationary I Bond Inflation Rate. The Inflation Rate was -2.78%, 05/01/2009 - 10/31/2009.

The May I-Bond Inflation Rate will be based on the Sep-Mar period. The current Sep-Feb rate is -1.39%, driven mostly by the large recent decline in oil prices. It is almost certain that we will have the second deflationary I Bond Inflation Rate announced in about a month.

[JDDS]

Spirit Rider beat me to it. I haven't decided if I'll buy any this year, but because of that I'll likely wait until the end of the year to decide. My money can make money elsewhere in the mean time.

[Grt2bOutdoors]

I would buy now, if only because I don't expect the fixed rate to be positive, if it is it will be maybe 0.10 with a variable rate of zero. If you buy now, the fixed rate is zero, the variable rate is 1.48% or 0.74% annually. You can then choose whether you want to cash out in a year or keep it as is, in any event, the I bonds are not quite the steal they were ten years ago when fixed rates were much higher.

[JDDS]

It is pretty reasonable to think that the composite rate for bonds issued now through October will be 0 for six months. So if one buys now, over the next 12 months the return would be 0.74%? Depending on the holding period and tax bracket, I could see the I bonds as being more valuable sooner. It's that whole power of zero thing though. I'd rather make more than 0 and possibly buy later in the year after the 6 months of 0 I'm reasonably sure are coming. The overall interest whichever route one takes is still small and really makes no difference.

[sawhorse]

I would buy now, if only because I don't expect the fixed rate to be positive, if it is it will be maybe 0.10 with a variable rate of zero. If you buy now, the fixed rate is zero, the variable rate is 1.48% or 0.74% annually. You can then choose whether you want to cash out in a year or keep it as is, in any event, the I bonds are not quite the steal they were ten years ago when fixed rates were much higher.

I thought the variable rate changes every 6 months depending on inflation, and everyone gets the current variable rate regardless of when they bought it?

[Grt2bOutdoors]

I would buy now, if only because I don't expect the fixed rate to be positive, if it is it will be maybe 0.10 with a variable rate of zero. If you buy now, the fixed rate is zero, the variable rate is 1.48% or 0.74% annually. You can then choose whether you want to cash out in a year or keep it as is, in any event, the I bonds are not quite the steal they were ten years ago when fixed rates were much higher.

I thought the variable rate changes every 6 months depending on inflation, and everyone gets the current variable rate regardless of when they bought it?

No - if you purchase the I bond during the November to April time period, you earn for the next 6 months the rate announced. Someone who purchases an I bond with a March or April 2015 issue date will earn an annualized rate of 1.48% or 0.74% over the next 6 months. If you buy in March, you earn that rate through September, then you earn the rate that was announced in May for the next 6 months (October through March), then the cycle begins anew. Someone who bought in November 2014 will earn the newly announced variable rate come May 1st - we project this rate to be "zero percent", therefore the I bond which currently has a zero fixed rate will earn zero percent for the next 6 months. You don't know with certainty if a fixed rate will be offered in the May announcement or November announcement, it could be zero. So, if you want certainty of earning some positive rate, I would purchase before the May announcement. I can't see the fixed rate being offered at a 0.5% or higher amount, though my crystal ball is cloudy right now.

[sawhorse]

Thanks for the explanation. So the rate is for six months regardless of whether the announced variable rate changes during those 6 months? If you buy in April, are you always 5 months behind in the rate changes, or is it only the first six months?

[Grt2bOutdoors]

Thanks for the explanation. So the rate is for six months regardless of whether the announced variable rate changes during those 6 months? If you buy in April, are you always 5 months behind in the rate changes, or is it only the first six months?

If you buy in April you will be 6 months behind the rate changes, it's always 6 months. April, May, June, July, August, September. Then you earn the new variable rate in October that was previously announced in May.

[LadyGeek]

FYI - I merged wassabi's thread into here. I also fixed the spelling in the title "IBonds" to "I Bonds".

The wiki has some background info: I savings bonds

We seem to have these questions arise every 6 months as each May 1 and November approach.

If anyone finds any more "should I buy I Bonds now or wait" threads, please report them so I can move them into here.

This thread is now in the Investing - Theory, News & General forum (general question).

[Clever_Username]

I'm waiting for the new rates because it can't be any less than 0. At the same time, even if it is higher, it won't be meaningfully higher. The last few months have seen seen big drops in oil, so I wouldn't be surprised if the inflation component is actually negative even though the bond itself can never be negative.

Maybe I'm having reading comprehension issues today. Can the fixed rate ever be below 0%? That is, do I have to worry about May's I-Bonds being worse than today's (other than the inflation rate adjustment)?

[sawhorse]

Maybe I'm having reading comprehension issues today. Can the fixed rate ever be below 0%? That is, do I have to worry about May's I-Bonds being worse than today's (other than the inflation rate adjustment)?

The fixed rate can never be below 0. (No one would buy them!) The inflation rate can be negative, but if the total fixed+inflation rate is negative, the Treasury bumps the total rate up to 0, so it will never be worse than stuffing it under your mattress.

[pascalwager]

I buy on January 1st to minimize the 5-year maturity date.

[sawhorse]

I've changed my mind and have decided to get them now. The penalty for withdrawing before 5 years is 3 months of interest. If the composite rate is 0 as some are predicting, then you don't lose anything because 3 months of interest equals 0.

So I'll get them now, get 1.48% for 6 months, and redeem them as soon as they are a year old with no actual penalty. By then hopefully the rate for new bonds will be higher.

People who bought when they first came out in 1998 got an incredible deal. Those bonds have actually outperformed the S&P 500 by roughly 10%.

[VictoriaF]

A couple years ago, I purchases I Bonds in January to be done and over with it. Then, unexpectedly, the rate shoot up to the whooping 0.2%. I still can't forgive myself for the lack of patience. Since then, I resolved to wait until 1 November, if the fixed rate earlier in the year is 0.0%.

Victoria

[zaboomafoozarg]

Then, unexpectedly, the rate shoot up to the whooping 0.2%. I still can't forgive myself for the lack of patience.

That's a steep price to pay for losing out on about $20 of interest per year

[VictoriaF]

Then, unexpectedly, the rate shoot up to the whooping 0.2%. I still can't forgive myself for the lack of patience.

That's a steep price to pay for losing out on about $20 of interest per year

When I lose tens of thousands of dollars in a market decline, that's OK. That's what risk and uncertainty are all about. But with the I Bonds in 2013 there was no uncertainty: When the rate was 0% early in the year it could either remain the same or go up. There was no objective reason locking in 0%.

And then there is loss aversion. Losing $20 can only be compensated by finding $40 on the road. I have been walking roads since 2013 and still no $40 in sight.

Victoria

[JDDS]

I've changed my mind and have decided to get them now. The penalty for withdrawing before 5 years is 3 months of interest. If the composite rate is 0 as some are predicting, then you don't lose anything because 3 months of interest equals 0.

So I'll get them now, get 1.48% for 6 months, and redeem them as soon as they are a year old with no actual penalty. By then hopefully the rate for new bonds will be higher.

People who bought when they first came out in 1998 got an incredible deal. Those bonds have actually outperformed the S&P 500 by roughly 10%.

So why would you get them if you plan on redeaming after 12 months? It seems like the only advantage over taxable is no state tax. Since online savings accounts are at ~1%, it seems like they're both going to give a higher return and are more flexible.

[feh]

Thanks all, I buy IBonds for my portfolio as part of the fixed portion of the AA and I plan to keep them for at least 5 years. I don't use them for my emergency fund. If I wait till November, I would put the $10K into a savings account at 1% in the meantime.

ETA: an alternative to iBonds would be an Ally 2 year "raise your rate" CD currently at 1.29%. I don't have any CDs currently in the fixed income bucket.

I have a short term bucket comprised of I Bonds, CDs and short term bond funds. I haven't bought any CDs in over a year due to the low rates, but am considering the Ally 2 year CD.

I'm also holding off on I Bond purchases. It's looking like November this year...

[RunningRad]

My suggestion is to purchase on a regular schedule and refrain from guessing on the "best time."

That's my approach.

[poker27]

This is kind of off topic, however...

Over the past couple years I have moved the bulk of my EF to Ibonds (75%). I have never had to withdrawal anything. If I did need to withdrawal a portion that has been vested past the 12 month mark, are there any hoops to jump through? Or is it a pretty standard put in the request and I have the $ within a week?

[Grt2bOutdoors]

This is kind of off topic, however...

Over the past couple years I have moved the bulk of my EF to Ibonds (75%). I have never had to withdrawal anything. If I did need to withdrawal a portion that has been vested past the 12 month mark, are there any hoops to jump through? Or is it a pretty standard put in the request and I have the $ within a week?

You'll have the money in a day or two, no need to wait a week unless you are redeeming a paper bond at the local bank branch.

[#Cruncher]

I ... figured that with the expected 0 variable rate coming in May, I might as well hold out until then in hopes of a .1 or even .2 percent fixed. I mean won't they struggle to sell iBonds offering nothing?

Good point! It's likely the inflation rate to be announced May 1st will be negative. (See this post by Spirit Rider.) If the Treasury were to leave the fixed rate at 0%, there would be no good reason for anyone to buy an I Bond from May through October. A buyer would earn nothing for six months and after that still have an I Bond with only a 0% fixed rate. It would be better to let money sit in an FDIC insured savings account until November when the fixed rate will be at least 0% and the inflation rate will likely be positive. But if on May 1st the Treasury set the fixed rate at some small positive value, there would be a reason to buy even if the composite rate is still 0%. (The reason is that in November the fixed rate could come back down.)

...If you buy in April, are you always 5 months behind in the rate changes ... ?

If you buy in April you will be 6 months behind the rate changes ...

Sawhorse is right. For an April I Bond the inflation rate announced May 1st will be applied October 1st and the inflation rate announced November 1st will be applied the following April 1st. This is a lag of five months. (See When does my bond change rates?.)

... Can the fixed rate ever be below 0%? ...

The fixed rate can never be below 0. (No one would buy them!)

The Treasury has never set a negative fixed rate -- even when TIPS rates were deeply negative. (See What have the rates been in the past?.) I assume this is the Treasury's policy; but I can't find a reference stating so. (I'd appreciate someone providing a reference.) I can only find a statement that the composite rate won't be less than 0%. (See Combining the two rates.) And just as investors bought TIPS with a negative yield, some people would buy I Bonds with a negative fixed rate.

[sawhorse]

[
So why would you get them if you plan on redeaming after 12 months? It seems like the only advantage over taxable is no state tax. Since online savings accounts are at ~1%, it seems like they're both going to give a higher return and are more flexible.

You're right. I forgot that the I bond interest rate was APR, not the semi-annual rate

[JDDS]

I ... figured that with the expected 0 variable rate coming in May, I might as well hold out until then in hopes of a .1 or even .2 percent fixed. I mean won't they struggle to sell iBonds offering nothing?

Good point! It's likely the inflation rate to be announced May 1st will be negative. (See this post by Spirit Rider.) If the Treasury were to leave the fixed rate at 0%, there would be no good reason for anyone to buy an I Bond from May through October. A buyer would earn nothing for six months and after that still have an I Bond with only a 0% fixed rate. It would be better to let money sit in an FDIC insured savings account until November when the fixed rate will be at least 0% and the inflation rate will likely be positive. But if on May 1st the Treasury set the fixed rate at some small positive value, there would be a reason to buy even if the composite rate is still 0%. (The reason is that in November the fixed rate could come back down.)

Yes, I figure they'll throw something out there to make us chew on. That's more reason to wait until October for me.

[Grt2bOutdoors]

...If you buy in April, are you always 5 months behind in the rate changes ... ?

If you buy in April you will be 6 months behind the rate changes ...

Sawhorse is right. For an April I Bond the inflation rate announced May 1st will be applied October 1st and the inflation rate announced November 1st will be applied the following April 1st. This is a lag of five months. (See When does my bond change rates?.)

[quote="sawhorse in [url=viewtopic.php?p=2435341#p2435341]this post[/url.

If you buy in April, you earn the rate announced the previous November 1st for a period of 6 months (April through September). That is a full 6 months, unless one assumes you are purchasing on the very last day of April, then you are receiving the benefit of the whole month even though you are handing over the money at the very end of the month. As you state, the inflation rate announced May 1st will then be applied beginning October 1st for another 6 months until the end of March. Beginning in April, the rate announced in the previous November will then be applied.

[Clever_Username]

Did we ultimately discover what the rates for I-Bonds purchased in May 2015 will be? Or is that information we won't know until May 1?

[Spirit Rider]

Did we ultimately discover what the rates for I-Bonds purchased in May 2015 will be? Or is that information we won't know until May 1?

There is no way to determine it ahead of time. The Treasury Department has to break out their Ouija board.

[camaro327]

0% composite. The Ouija board is still necessary to determine the fixed rate. So at midnight maybe someone can break out their board and see what it says.

[ForeignInvestor]

Hot off the presses: Fiscal Service Announces New Savings Bonds Rates, Series I to Earn 0.00%, Series EE to Earn 0.30% (May 1, 2015)

[#Cruncher]

For those interested, here are the composite rates that will take effect from May 2015 - October 2015 [ 1 ] and run for six months for all outstanding I Bonds, including newly issued ones with a 0.00% fixed rate. [ 2 ] They incorporate the new negative semi-annual inflation rate of -0.80%:

Code: Select all

  Fixed Rate Announced      Fixed   Composite
# Times   First    Last     Rate      Rate
-------  ------   ------    -----   ---------
   1     May 00             3.60%     1.97% [ 3 ]
   3     Sep 98   Nov 00    3.40%     1.77%
   2     Nov 98   May 99    3.30%     1.67%
   1     May 01             3.00%     1.38%
   2     Nov 01   May 02    2.00%     0.38%
   1     Nov 02             1.60%     0.00%
   2     May 06   Nov 06    1.40%     0.00%
   1     May 07             1.30%     0.00%

Code: Select all

   2     May 05   Nov 07    1.20%     0.00%
   2     May 03   Nov 03    1.10%     0.00%
   3     May 04   Nov 05    1.00%     0.00%
   1     Nov 08             0.70%     0.00%
   1     Nov 09             0.30%     0.00%
   2     May 10   Nov 13    0.20%     0.00%
   2     May 09   May 14    0.10%     0.00%
   9     May 08   May 15    0.00%     0.00%

As the table shows, all I Bonds with a fixed rate of 1.60% or less benefit from the 0% floor on the composite rate. Without this floor the composite rate would be negative and the nominal value of the I Bond would fall for six months. Because of the floor, the nominal value remains constant during the six months -- and the real value increases. These composite rates summarize the 515 column near the left side of the I Bond Composite Rates triangle. The source is TreasuryDirect's What have the rates been in the past?.

1. New composite rates take effect every six months after the month an I Bond is purchased. For example, these composite rates will take effect May 2015 for an I Bond purchased in May or November; but won't take effect until October 2015 for an I Bond purchased in April or October. See When does my bond change rates?
2. Click here for my post from six months ago with the previous composite rates.
3. Composite rates are computed as follows:

   Code: Select all

   composite rate = fixed rate + ( 2 X inflation rate ) + ( fixed rate X inflation rate )
           0.0197 = 0.0360     + ( 2 X -0.0080        ) + ( 0.0360     X -0.0080        )

   But if the result of the computation is negative, the composite rate is set to 0.00%.